The Latest Adventures Of Alice In Euroland

"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean ? neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be the master ? that's all."

It is now quite obvious; the political elite of Europe are all now deeply immersed in “Alice in Wonderland.” This must be the case. The Spanish Prime Minister says one thing, the German Finance Minister says the exactly opposite thing and is joined by the Prime Minister of Finland and the caterpillar sits in the tree smoking his hookah pipe and they all must be joining him. It may be left or it may be right but I choose to believe those who are providing the money and not those who are in receipt of it. Rajoy’s “This is a great victory for Europe” speech may go down as one of the most audacious of the decade as it was surely written by the caterpillar or someone who had joined him in puffing away prior to the siesta. Maybe Rajoy should start a new show on TV; “Huff and Puff” sponsored by Amigo (Bud) Light and Inquisition Light.

“As laid down in the ordinances of St. Dominica, the penitent, it was commanded should be stripped of his clothes and beaten from by a priest three Sundays in succession from the walls of the village to the gate of the church; he must not eat any kind of meat during his whole life; must abstain from fish, oil, and wine three days in the week during life, except in case of sickness or excessive labor; must wear a religious dress with a small cross embroidered on each breast; must attend mass every day, if he has the means of doing so, and vespers on Sundays and festivals; must recite the service for the day and night and repeat the patemoster seven times in the day, ten times in the evening, and twenty times at midnight. If he failed in any of these requirements he was to be burned as a relapsed heretic.”

-Llorente

The Wizard Posts a Serious Warning

With the Italian 10 year at a 6.15% and the Spanish 10 year at a 6.60% this morning; pause. My recommendation is to be out of all European sovereign and bank debt but if you have to own some because of your mandate or because you are attached to some Index then it is time to stop, look and listen. The Red Queen (Angela Merkel) and her minions are playing “off with their head” games and the situation is not a joke. The EFSF loans are going to be replaced by ESM money when the fund comes into existence and this means that your position as a senior bond holder will be subordinated to the IMF and/or the ESM. Any country including the existing troubled nations (Greece, Ireland, Portugal, Spain and shortly Cyprus) are going to have their debt replaced by the capital of the ESM so if you own any of these sovereign credits or any of their banks then you are going to be placed in a junior position by fiat. Then we have just seen what happens with “local law” bonds as demonstrated by Greece so that you need to swap out of any “local law” bonds ASAP and only own bonds governed by American, British or Swiss law. This would be for any and all nations on the Continent without exception. When it comes to bond holders versus taxpayers the taxpayer will always win so you must protect yourselves now rather than having your head handed to you later. There is no joy in finding your head on some silver platter I assure you and you must make the changes now and not later. I cannot stress this enough and I hope you are paying attention!

The final consideration is a matter of the currency; what if Europe does blow up? If you own good old American names such as IBM or DuPont that are denominated in Euros; what if there is not a Euro any longer? This may have been an outlier question several years ago and you may be in the camp that “everything will be just fine” but what if you are wrong? The currency issue is not an outlier consideration any longer. It is then a question of how much risk you wish to take or have your clients take and it is an issue that surely can be ignored no longer. Consequently I place it squarely on the table for you to ponder and vote on; one way or the other.

Europe is behaving badly. There is no apparent game plan besides shifting with the tides. From one day to the next it is not apparent what they are going to do or how they are going to do it. The Continent is a mess and will likely worsen as their troubles increase. The European banks are in never-never land, leveraged to the hilt, financial statements without the ring of truth and lied about by the nations that govern them. Fantasies of some silver bullet or of Germany rolling over are hookah induced dreams in my view and moving everything down the road just makes the walking more difficult until the traveler stumbles under the burden that he has accumulated and then falls. The purported financial wall that was to protect Spain was little more than a puff of hot air on a summer afternoon and the notion that Italy would also be protected has just been shot with holes courtesy of Marino of Madrid.

The markets, as demonstrated by the 4.4 hour relief rally that quickly went south, are beginning to get the joke and institutions all across the world are heading for the door as a matter of the loss of faith and the imposition of seniority that could eventually apply not just to the sovereigns and the banks but to any and all asset classes in Europe. The Socialists demand, the Germans refuse and the winner, always the winner, are those with the money and not those that demand that it be shared. If you want a weighting then the bailed-out nations get a “1” and the socialist countries needing money get a “2” and Germany gets a “10” and that is how I would weight their statements in terms of what actually will get done.